When the fossil-fuel divestment movement first stirred on college campuses three years ago, you could almost hear Big Oil and Wall Street laughing. Crude prices were flirting with $100 a barrel, and domestic oil production, from Texas to North Dakota, was in the midst of a historic boom. But the quixotic campus campaign suddenly has the smell of smart money.
One of the biggest names in the history of Big Oil – the Rockefellers – announced last September that they would be purging the portfolio of the Rockefeller Brothers Fund of “risky” oil investments. And that risk has been underscored by the sudden collapse of the oil market. After cresting at more than $107 in mid-June, the price of a barrel of West Texas Intermediate dipped below $50 a barrel in early January. The crash carries big costs: Goldman Sachs warned that nearly $1 trillion in planned oil-field investments would be unprofitable – even if oil were to stabilize at $70 per barrel. The industry is already scaling back the hunt for high-cost sources of new oil. Chevron has shelved drilling in the Canadian Arctic, and Hercules Offshore, a significant driller in the Gulf of Mexico, has idled four rigs and laid off more than 300 workers.
Plunging profits are also putting the brakes on fracking. The biggest player in North Dakota, Continental Resources, is cutting expansion plans by more than 40 percent for 2015. And if crude prices drop much lower, the U.S. boom could go bust. The break-even price in North Dakota’s Bakken field, Continental CEO Harold Hamm confessed to Business Week in November, is $50 a barrel. Oil’s collapse threatens to destabilize global governments from Caracas to Tehran to Moscow. And it is punishing the valuations of oil companies: From late June to early January, across the world, the 10 oil firms with the largest proven reserves collectively lost roughly 20 percent of their market value.
As painful for oil investors as this market spasm has been, it may just be a taste of greater punishment to come. In November, when the U.S. and China announced a historic agreement to curb carbon emissions in coming decades, it sent a strong, if vastly overdue, message to the world’s carbon kingpins: Global governments are mobilizing to meet the threat of climate change. If they’re going to take that message seriously, more than two-thirds of established fossil-fuel reserves will have to stay in the ground.
A 2013 study by the bank HSBC warned that between 40 and 60 percent of the market value of European fossil-fuel companies, like BP and Royal Dutch Shell, could be wiped out in a carbon-constrained world. This past October, the head of England’s central bank, Mark Carney, declared that “the vast majority of reserves are unburnable.” Carney warned that fossil-fuel investors, focused on short-term profits, were not pricing in this reality – a phenomenon he called a “tragedy of horizons.”
But a growing number of savvy, social-minded investors are waking up to this risk and moving their money out of fossil-fuel stocks. In September, as the price of oil was entering its free fall, 50 foundations announced they would be ending their investments in fossil fuels over the next five years – a deal orchestrated by Divest-Invest Philanthropy. An initiative launched by the Wallace Global Fund to encourage institutions to exit Big Carbon investments and begin capitalizing sustainable alternatives, Divest-Invest has now secured more than $50 billion in divestment commitments. And these climate-conscious philanthropists are driving toward an even more ambitious goal: $150 billion in divestment commitments before the next round of U.N. climate talks in Paris next December.
These foundations require high-market returns to fund their philanthropy, and are managed by investment professionals loathe to leave returns on the table. But Jenna Nicholas, project manager of Divest-Invest, says there was minimal arm-twisting required. “The financial argument for divestment is actually stronger than the argument for maintaining holdings in these companies,” Nicholas says. Indeed, Big Carbon investments are “severely overpriced” in the market, wrote Bevis Longstreth in a 2013 piece called “The Financial Case for Divestment of Fossil Fuel Companies by Endowment Fiduciaries.” Longstreth, who served as commissioner of the SEC under Ronald Reagan, wrote, “Fiduciaries have a compelling reason, on financial grounds alone, to divest these holdings before the inevitable correction occurs.”